Apple Profits Jump 12% in Q3

Apple Inc. (AAPL) signaled that the long wait for new products is nearing an end.

With bigger-screen handsets in development, Apple said yesterday that shoppers are delaying buying new iPhones, which will weigh on sales in the current quarter ending in September. Yet rather than dissuade buyers from procrastinating, Apple stoked anticipation for new devices on a conference call, with Chief Executive Officer Tim Cook talking about an “incredible pipeline” that “we can’t wait to show you,” and finance chief Luca Maestri declaring it would be a “very busy fall.”

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Looking ahead to new gadgets is the main reason investors barely reacted to Apple’s fiscal third-quarter results yesterday. The world’s most valuable company posted a 12 percent rise in net income to $7.75 billion and a 6 percent revenue increase to $37.4 billion, with strong iPhone and Mac sales making up for a drop in iPad demand.

Apple shares rose 2.6 percent to $97.19 at the close in New York, leaving them up 21 percent this year.

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Instead, investors were buzzing about Apple’s coming slew of products. The Cupertino, California-based company, which hasn’t released a new mobile device since last year, is working on larger-screen iPhones, a potential wearable device and an upgrade to Apple TV, people familiar with the plans have said.

‘Big Time’

“You’d have to live in a cave to not know that Apple is coming out with a big new batch of iPhones,” said Michael Binger, a senior portfolio manager at Gradient Investments LLC, which manages about $600 million and owns Apple stock. “We’re coming in to a big time for Apple in the back half of the year.”

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Apple has released new iPhones each September for the past two years.

Maestri, who took over as Apple’s chief financial officer this year, said in an interview that the trend of customers waiting for new releases is especially pronounced in English-speaking countries where more rumors are spread online about the company’s product pipeline. He said Apple took that phenomenon into account when crafting its outlook for the current quarter. The company projected sales of $37 billion to $40 billion, slightly below the $40.6 billion estimated by analysts.

“We’re seeing some purchase delays and we’ve reflected that in our guidance,” Maestri said. “It happens. We have to live with that.”

IPhone’s Importance

In the most recent quarter, iPhone sales rose 13 percent to 35.2 million and Mac sales increased 18 percent to 4.4 million. That helped offset a second-straight quarterly decline for the iPad, with sales dropping 9 percent to 13.3 million as the tablet market becomes more saturated, especially in the U.S. and Western Europe.

The results reinforced the importance of the iPhone, which accounts for more than half of Apple’s revenue and about 70 percent of total profit, according to ISI Group.

Apple is set to release new iPhones with 4.7-inch and 5.5-inch screens, people familiar with the plans have said. The devices are anticipated by some analysts to be the company’s biggest sellers since the iPhone’s 2007 introduction.

Apple is responding to a shift in consumer taste toward bigger-screen smartphones, a trendSamsung Electronics Co. (005930) and others have capitalized on to grab market share from Apple. In China, about 40 percent of mobile gadgets sold based on Google Inc.’s Android operating system in 2014 had display sizes of more than 5 inches, according to an estimate by Forrester Research.

“Apple’s fortunes are tied to the iPhone,” said Binger.

No Dent

After posting its first profit decline in at least a decade last year, Apple now appears to be settling into a stretch where it reports modest revenue and earnings growth each quarter while also returning money to shareholders through dividends and buybacks. It’s a shift from when the iPhone was a young product and the company’s revenue was almost doubling every quarter, yet investors have sent the stock up more than 18 percent this year to near an all-time high after accounting for a 7-for-1 stock split.

At least for the immediate future, Apple will remain reliant on the iPhone. Case in point: If Apple sells 30 million units of a new wearable device in the first 12 months, it will generate about $9 billion in revenue, according to Morgan Stanley. That’s equivalent to about 5 percent of Apple’s $171 billion in sales last year.

China Focus

China also continues to be a major focus for Apple. Over the past quarter, the company said iPad sales jumped 51 percent in the world’s most populous country, while iPhone sales rose 48 percent, boosted by a partnership to sell the handset through wireless carrier China Mobile Ltd. Mac sales also increased 39 percent in China, Cook said.

“China, honestly, was surprising to us,” Cook said yesterday on the conference call. “We thought it would be strong, but it went well past what we thought.”

Along with China, sales in Brazil, India and Russia also have been strong. IPhone sales in those countries increased a total of 55 percent last quarter.

Apple also is working to sell more iPhones and iPads to companies to give to employees. Apple this month struck a partnership with International Business Machines Corp. (IBM) to sell the iPhone and iPad to big companies and create business-specific applications. Getting Apple a larger footprint within businesses is an “enormous opportunity,” Cook said on the call.

More sales to enterprises like IBM’s customers in health care, banking and travel could help reignite growth for iPad sales, Cook said.

“There’s a substantial upside in business and this was one of the thinkings behind the partnership with IBM that we announced last week,” Cook said.

Deals Hunt

The rise in Apple’s stock shows the company continuing to benefit from people moving more of their digital lives onto mobile devices. By contrast, Microsoft Corp. (MSFT) last week announced plans to cut 18,000 jobs as it struggles to make the transition to the mobile-centric technology market.

Cook said on a conference call that Apple continues to look for acquisitions. The company has purchased 29 companies since the start of fiscal year 2013, and made five deals last quarter, he said.

After facing criticism from activist investors such as Carl Icahn to return more money to shareholders, Apple also continued to boost its dividend. The company said it would give a dividend of 47 cents a share that will be payable on Aug. 14 to shareholders of record as of Aug. 11. Through dividends and buybacks, Apple has now paid out $74 billion as part of a $130 billion capital return program that’s authorized for another six quarters.

Apple had $164.5 billion in cash and investments at the end of last quarter, with all but $27 billion held outside the U.S. International sales accounted for 59 percent of the company’s revenue last quarter.

To contact the reporter on this story: Adam Satariano in San Francisco atasatariano1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Jillian Ward